There are several approaches that I reckon could help with the inflationary pain of the next 12 months. I’ve picked one UK share for each.

Dividend yield

Seeking high dividends is one way. If inflation climbs reaches 10%, then adding 10% in dividend cash to our pot seems like a good choice.

I’d go for Persimmon (LSE: PSN) to try to achieve that. It’s hard to guess what the full-year dividend will be, but forecasts currently put it at around 18%. That’s come about due to a hefty share price fall.

If the housing market slumps, housebuilder shares could fall further and dividends could be cut. But I rate the sector as a relatively safe one for long-term investors, even if we suffer short-term volatility.

Others I’d consider for one-year high dividends include Rio Tinto (10.5%) and M&G (10.8%), bearing in mind the risk that these are only forecasts and could change for the worse.

Essentials

Investing in essential goods or services is also, I think, a good way to help offset inflation. I’m thinking of National Grid (LSE: NG), which is on a forecast dividend yield of 5.7%.

That’s not enough to beat double-digit inflation in just one year, but it’s a start. More importantly, it’s a company that provides an essential service. I know we’re in the middle of an energy crisis, and people will be cutting back on usage. But it’s not something like holidays, or fashion accessories, which people can simply stop buying during tough times.

The National Grid share price has fallen in the past few months, and it looks good value to me.

Alternative choices for essentials include Tesco (5.7% forecast dividend) and United Utilities (5.2%).

Progressive

Investing in shares usually wins out over inflation not in one year, but over time. If a company pays only modest dividends, but keeps them growing progressively, it can come out well ahead. The dividend only needs to beat long-term average inflation, not each individual year’s.

I’d also go for an investment trust. Specifically, one of the the Dividend Heroes (as selected by the Association of Investment Companies) which have raised their dividends for at least 20 years in a row.

My choice is City of London Investment Trust (LSE: CTY), whose dividend has risen for 56 straight years. Currently its dividend looks set to yield 5.2%.

Alternatives include Merchants Trust (40 years, 5.4%) and Murray Income (49 years, 4.8%)

Bottom line

There’s a key risk with relying on dividends to help with inflation. They might be cut, or annual rises might be reduced. And that could affect share prices. We need to consider these risks when we invest.

But for me, the bottom line in trying to keep my investments ahead of inflation is straightforward. If I don’t plan to sell my shares this year, then the purchasing power of my cash doesn’t matter right now. All that matters is that I beat inflation in the long run, over the years I intend to keep investing.

Starting today, these three dividend shares would definitely make it on to my shortlist. In fact, not starting today, I already own them.

Investment trust

I love investment trusts. They give me a great way to spread my money over a chosen strategy, with some very useful diversification.

City of London Investment Trust (LSE: CTY) is one of my favourites, which I bought for long-term income. Admittedly, the share price hasn’t done much over the past few years.

But we have a cracking dividend record to make up for it. City of London currently offers a dividend yield of 5.2%.

But, more importantly, it’s raised its annual dividend for 56 years in a row. Part of that comes from an investment trust’s ability to retain some cash during strong years to support its dividends in weaker times.

There’s a risk that rises over the next few years might be small, effectively losing money against inflation. But I could live with that over the short term.

Housing dividends

My next choice has seen its share price fall 50% in the past 12 months. I’m talking about housebuilder Persimmon (LSE: PSN), as investors fear a housing crunch.

But Persimmon has been paying me fat dividends for some time now. I’ve had strong ordinary dividends, plus a tasty extra from special dividends as the company has been returning surplus capital. Forecasts put this year’s total dividend on a massive 18% yield.

Oh, and the market sell-off has pushed the Persimmon price-to-earnings (P/E) ratio down to just five.

The risk is perhaps obvious, that soaring interest rates could harm the property market. And that juicy dividend might need to be cut. But I see those as short-term worries. And even a 50% dividend cut would still leave a 9% yield on the current share price.

Bank cash

My third big hold for 2023 is Lloyds Banking Group (LSE: LLOY). Lloyds is on the other side of the equation, and should benefit from rising interest rates. Lending margins can be quite a bit healthier when base rates are high compared to down at 0.5%.

Lloyds is the UK’s biggest residential mortgage lender, so increasing mortgage rates should help too. This is likely to be offset by lower lending volumes. But that could take a while to work through. And over the next few years, I don’t see a great threat to the Lloyds dividend.

The share price remains depressed, keeping the forecast P/E down as low as 6.2.

That pushes the 2023 forecast dividend yield up to nearly 6.5%. And analysts have it rising further, to 7%, by 2024. Forecasts are uncertain at the best of times, and I do treat those with caution.

But Lloyds’ liquidity and cash flow look healthy enough to me. And I’m optimistic over long-term dividend prospects.

Take City of London Investment Trust (LSE: CTY), a higher-yielding investment trust often regarded as a proxy for UK plc. I’ve owned a chunk of it for years. Stolid and steady, it’s had the same manager — Job Curtis — since 1991.
 
But in the bond market rout of late September, the yield on 10-year government gilts came within spitting distance of what a stake in City of London would earn you.
 
And that, my friends, is simply crazy.

Risk premium

There’s a hierarchy in these things.
 
Equities — shares in companies — have a higher yield than bonds, to compensate for the higher risk.
 
Bonds — loan to companies, in effect — have, in turn, a higher yield than gilts (which are bonds issued by the UK government (and judged safer than bonds issued by companies. They’re called ‘gilts’ because back in the day, the certificates were gilt-edged.
 
Only in banana republics would one expect loans to the government to be regarded as risky enough to be on a par with equities.
 
But that, it seems, is where we are.

Crisis? What crisis?

I’m looking at a 40-year chart of 10-year gilt yields. At the start of that period, gilt yields oscillated in the 10–15% range.
 
Britain, you’ll recall, was ‘the sick man of Europe’. Strikes were endemic, the ‘Winter of Discontent’ still a raw, fresh memory, and prime minister James Callaghan’s custody of the economy yielded the immortal headline ‘Crisis? What crisis?’ — although Callaghan himself apparently never uttered those words.
The markets’ reaction to Liz Truss’s inaugural mini-budget would have been all too familiar to Callaghan: soaring gilt yields, rising interest rates, and plunging share prices.

Sure enough, at the other end of that 40-year chart — the last two weeks, in other words — the ten-year gilt yield chart rockets skywards like something built by Elon Musk’s SpaceX.

As recently as January, the 10-year gilt yield was 1%. Now, it’s hovering around 4%.

Bargain — or falling knife?

What should investors do?
 
Now, gilt yields rise because gilt prices have fallen. And sure enough, gilt investors have suffered heavy losses.
 
And I’m sure some investors are thinking of buying into that dip — although ‘crash’ is a better word than ‘dip’ in this case. Nor is it difficult: just about every fund supermarket will have funds offering exposure to gilts.
 
But I’m not so sure that this would be a good idea.

Despite the U-turn on the higher-rate tax cuts, the public finances are still wobbly. The other unfunded tax cuts remain. Government borrowing costs have been driven up, just when Liz Truss has announced a huge splurge of further debt to fund subsidised energy for households and businesses, stamp duty cuts, and a reversal of higher corporation taxes.
 
Investors may need to wait a long time for gilt markets to recover back to yields of 1% or so. And in the meantime, the yield they’re getting is running at around half the level of inflation — and with holding to redemption the safest strategy, the capital risk in real terms could be significant.
 
And unlike dividends — which can rise — gilt (and bond) yields are locked in at the time of purchase. What you buy is what you get.

Equity upside

Equities, to my mind, remain the better bet.

Which equities? Me, I’m tempted to throw a little more money at City of London Investment Trust — where the dividend has risen without a break for 56 years.

No dividend is ever guaranteed, though, which is why I diversify across different shares. Here are three I would buy now.

City of London Investment Trust

The City of London Investment Trust (LSE: CTY) invests in a variety of different companies, offering me exposure to different sectors. That should help it earn money across the economic cycle.

At the moment, the yield is 4.5%. I find that attractive and would be happy to receive it. But I am also impressed by the trust’s dividend history. It has raised its dividend annually since the England team won the World Cup. As any long-suffering football fan knows, that is a very long time!

Dividends are never guaranteed. One risk is a market downturn hurting returns at the companies in which the trust has invested. That could hurt its own profits. But with a long-term mindset, I would gladly tuck this share away in my portfolio.

Diageo

Another company that has raised its dividend annually for a long time is Diageo (LSE: DGE). The manufacturer of drinks such as Guinness and Lagavulin has clocked up over three decades of yearly increases.

Part of the reason it has been able to do this is the pricing power its portfolio of premium brands gives it. There simply is no direct substitute for a Guinness or Lagavulin. So when the company faces a risk to profits from cost inflation, as is happening at the moment, it can increase its selling prices without worrying that it will lose a lot of customers. That supports substantial profits – last year, the company reported £2.8bn in post-tax profits on revenue of over £19bn.

The Diageo share price is close to its all-time high, which has pushed the dividend yield down to 1.8%. But if I wanted to buy a share, tuck it in my portfolio and hopefully receive dividends from it for many years to come, Diageo would be on my shopping list.

Unilever

I would also buy Unilever (LSE: ULVR). Like Diageo, this UK multinational benefits from a portfolio of premium brands. Its products are used billions of times a day across the globe, meaning that there is steady customer demand. That can help to support both revenues and profits. The Unilever dividend is currently 4.2%.

I see a company like Unilever as a sort of bellwether for the global economy. I do not expect this stately business to move suddenly into a dramatic growth phase. But it ought to benefit from a growing global population and increasing disposable income in many markets. Conversely, a recession could force consumers to cut back on premium brands and hurt Unilever’s profits. But with an eye on the long term, I would be happy to buy and hold this share.

Unlike other investment vehicles, these companies do not have to pay out all of the income they receive from their portfolios each year. They can hold 15% back in reserve.

This means they can hold back some of the income they receive in good years and use it to boost dividends when businesses may be cutting theirs.

This structural advantage gives investment trusts a unique quality. It also means they have been able to pay consistent dividends through both the good and bad times. 

This quality is the main reason why I believe investment trusts deserve a place in my passive income portfolio. With that in mind, here are two trusts I would buy for income right now. 

Investment trusts for income 

The first on my list is the City of London Investment Trust (LSE: CTY). This firm has one of the longest track records of consistent dividend increases in the investment trust space. It has continually increased its payout for 55 years.

The portfolio is concentrated in a diverse basket of London-listed equities. At the time of writing, the stock supports a dividend yield of 4.8%.

A downside of using investment trusts to invest for income is they tend to charge an annual management fee. In this case, it’s nearly 0.4%. This charge could eat into investor returns in the long run.

There will also be a chance the manager could pick the wrong investments, incurring losses for my portfolio. 

Even after taking these factors into account, I would buy the City of London for my portfolio as an income investment today. 

Passive income play 

While City of London has a UK focus, the Bankers Investment Trust (LSE: BNKR) has a more diverse focus. 

Like City, Bankers has also been paying and increasing its dividend for 55 years. At the time of writing, the stock supports a dividend yield of 2%. It has an annual management charge of 0.5%. 

Some of the most significant holdings in the portfolio are international growth and income giants. The largest is technology group Microsoft. The trust has made a trade-off here. Rather than focusing on income alone, it focuses on income and growth, which has produced better capital returns in the long run. 

Still, Bankers’ focus on growth stocks rather than income plays alone could expose me to more volatility. If these companies do not live up to the market’s lofty growth expectations, they could underperform and hit the trust’s returns.

The focus on growth and the lower yield are the reasons why I would own this company alongside the City of London. I think the two corporations complement each other perfectly. 

With the benefit of hindsight, I’d do things a little differently. Here, I want to explain how I’d invest £3,000 today if I was starting from scratch.

Before I start, a quick health warning. Investing in the stock market can be a great way to build wealth, but the future value of shares is always uncertain. Share prices can fall and there’s no protection if things go wrong.

For this reason, I’d always make sure I had at least three-six months’ income saved in cash before I put money into the stock market.

How I’d start investing in stocks

Three thousand pounds is not a huge amount in stock market terms, but I think it is enough to build a decent starter portfolio.

What I’d do is invest £2,000 in an investment trust. This would give me exposure to a ready-made portfolio, run by professional management.

The one I’d choose is City of London Investment Trust (LSE: CTY). This trust invests in good quality large companies, with a bias towards dividend stocks. City of London’s largest holdings including drinks giant Diageo, British American Tobacco, Tesco and insurer Phoenix Group.

However, this trust is not just a FTSE 100 clone. Its portfolio also includes FTSE 250 dividend stocks and overseas firms such as Microsoft, and Swiss-based Nestle.

City of London shares currently offer a dividend yield of 4.8%. This is usefully higher than the FTSE 100 yield of around 4%. I also consider the trust’s payout to be exceptionally safe — it has increased its dividend for 54 consecutive years. That’s one of the longest records in the UK market.

What to watch

I feel confident I could put my money into City of London Investment Trust and probably never need to sell. But one risk that concerns me is that the trust’s focus on income could mean its share price growth underperforms the wider market during periods of strong growth.

Another possibility is that the trust will alter its strategy or increase its fees — both could leave shareholder returns lagging a cheaper index tracker fund.

However, these risks would not stop me buying City of London Investment Trust. On balance, I think it would be an ideal way for me to create a starter portfolio with limited cash.

Here’s how I’d invest the final £1k

I’ll admit City of London Investment Trust is quite boring. It’s never likely to make headlines or deliver the kind of rapid gains possible with a successful growth stock. 

Personally, I’ve got no problem with this. Where my money is concerned, I don’t want too much excitement. But as an active investor, I do want to have a chance of beating the market and finding big winners.

For this reason, I’d use the final £1,000 of my £3,000 budget to invest in small-cap growth stocks. The smallest amount I’ll invest in a single stock is £500, to limit the impact of trading costs. With £1k, I’d be able to add a couple  stocks to my portfolio.

So here I’m going to look at two small-cap stocks I’m interested today.

#Small-cap 1: a genuine bargain?

My first pick is currency exchange specialist Argentex (LSE: AGFX). This £100m company specialises in providing forex services to companies and wealthy individuals. After a difficult period in 2020, this business appears to have returned to growth.

Revenue rose by 33% to £15.7m during the six months to 30 September, while pre-tax profit was up 22%, at £3.3m. Profit margins are high, at around 27%. Argentex also converts most of its income to cash, supporting a useful forecast dividend yield of 2.6%.

Founder and chief executive Harry Adams owns 12.3% of Argentex stock. Therefore, I reckon his interests should be well-aligned with those of shareholders.

The main risk I can see is this sector is increasingly competitive. There are a number of smaller companies who are cutting the cost of foreign exchange and fighting to take market share from the big banks.

There’s no guarantee that Argentex will be a long-term winner. But the stock looks cheap to me on 11 times 2022 forecast earnings. If it can hit earnings growth forecasts of 34% for the current year, I think the shares could rise sharply. This is a stock I’d like to add to my portfolio.

#Small-cap 2: a UK consumer favourite

Sofa and carpet retailer ScS Group (LSE: SCS) benefited from a surge of pent-up demand last year and delivered very strong sales.

The company says that new orders have now returned to pre-pandemic levels after last year’s post-lockdown surge. But ScS’s order book of £132m at 20 November is still nearly double the level seen before the pandemic. This suggests to me that profits should be strong this year as the order book is gradually delivered.

One attraction for investors here is that ScS does not have to pay upfront for its stock. Instead, it collects a customer deposit and then orders from its suppliers. Customers must pay for their products before delivery, but ScS does not normally pay its suppliers until the end of the month following delivery.

As a result of this model, the retailer generates a lot of cash. At the end of the last financial year (July 2021), the group reported net cash of about £50m, excluding customer deposits.

The main risk I can see is that when ScS next reports, we’ll find an order slowdown since last year has continued. With travel likely to reopen this summer, people may choose to spend on holidays instead. Rising inflation could also be a problem, as it may put household finances under pressure.

As I write, its shares are trading on just eight times forecast earnings, with a forecast dividend yield of 5.9%. I think the shares are probably cheap at this level, especially given the company’s net cash position. So ScS is a stock I’d consider buying today.

There’s a common rule of thumb that an investor needs between 10 and 15 stocks in their portfolio to get sufficient diversification. But who can buy that many all at once? So, my first purchase would be an investment trust, and I currently hold City of London Investment Trust (LSE: CTY).

City of London holds a wide range of UK shares, including some top FTSE 100 ones. It counts British American Tobacco, Diageo, Unilever, BAE Systems and HSBC among its top 10 holdings. So, as a new investor, I might only be buying shares in one company. But I’d get healthy diversification from it. On top of that, City of London has raised its dividend for 54 years in a row, so there’s a nice income stream too.

There’s always a risk that a managed investment company can go bad — just ask anyone who invested with Neil Woodford. But I think a top investment trust would always be my first pick for a new portfolio.

Income beats growth, for me

Some new investors enjoy watching their share prices grow. I get a bigger thrill seeing dividend income building up in my portfolio. Share prices are one thing, but dividends are actual cash. National Grid (LSE: NG) is one of my long-term favourite dividend shares which I’ve never got round to buying — I tend to find different dividends to go for every time.

Only last week, I logged in to check my portfolio, and my latest dividend payment meant I had enough cash for a new purchase. So I bought some Greencore shares, and it felt like I was getting them for free. I then worked out that my average portfolio dividend yield is lower than the 5.2% forecast for National Grid. It made me wonder how much better off I might be had I bought National Grid shares as a new investor all those years ago.

I’ve always liked finance sector stocks, having bought a number over the years. Right now I hold Lloyds and Aviva, and neither has done well for me recently. Starting again as a new investor, I’d still want either a bank or an insurer. And if it was to be one of my first three stocks, I’m pretty sure I’d go for Prudential (LSE: PRU).

Best for a new investor?

Prundential doesn’t pay one of the biggest dividends. But it’s been one of the best managed companies in the sector, in my view. And while the whole financial sector has been through a bad patch, Prudential shares have still managed a 36% gain over the past five years. The two I hold have done significantly less well than that.

I think we’re likely to face tough economic conditions for a while yet. And when business isn’t doing so well, the financial sector tends to suffer. But I do think Prudential is one of the very best, and I’m optimistic for the long term.

There are plenty of alternatives I might have chosen as my first stocks as a new investor. But I’d be happy with these three.

G A Chester: Bunzl 

Distribution and outsourcing specialist Bunzl (LSE: BNZL) doesn’t have the highest yield in the FTSE 100. But it does have a track record of 28 consecutive years of dividend increases at a compound annual growth rate of 10%. Growth has been supported by a successful bolt-on acquisition strategy. 

I’ve always liked the company’s significant exposure to non-cyclical and less-cyclical customer markets. And the business has been highly resilient through the pandemic. The share price has underperformed the Footsie so far in 2021, and I reckon a starting yield of 2.4% makes this a good time for me to buy for long-term income. 

G A Chester has no position in Bunzl.

Roland Head: Direct Line Insurance Group

FTSE 250 insurer Direct line Insurance Group (LSE: DLG) is my top dividend stock, thanks to an 8% dividend yield that I believe is sustainable.

This well-known motor and home insurer has been investing in new technology over the last couple of years to improve its underwriting. Direct Line has also been expanding its business insurance division, where sales rose by 16.1% during the first quarter.

One risk is that new regulations banning price hikes for renewal customers could affect Direct Line’s profits over the next few years. However, the new rules were expected, and my experience is that larger companies generally handle regulatory changes more easily than smaller rivals.

I see Direct Line as a buy at current levels.

Roland Head owns shares of Direct Line Insurance Group.

Ben Hargreaves: National Grid

I think buying shares in National Grid (LSE:NG) could be a solid investment for a dividend-focused portfolio. The company has a strong presence in the UK but also has a large presence in the US, where it serves approximately 10 million customers. This adds geographic diversification to its strengths, amid the stable environment it operates in as a utility company. 

National Grid offers a dividend of 5.2% and its share price has grown by 11% in the year-to-date. One note of caution is that the share price has only risen by 14% over the last three years. However, when dividends are accounted for, I believe following a buy-and-hold strategy with National Grid in the long term should make it a solid earner. 

Ben Hargreaves has no position in National Grid.

Edward Sheldon: Unilever

My top dividend stock for June is consumer goods giant Unilever (LSE: ULVR). It currently offers a prospective dividend yield of around 3.4%.

I like Unilever for a few reasons. One is that the company is a reliable dividend payer with an excellent dividend growth track record. Over the last 70 years, Unilever has grown its payout by around 8% per year.

Another reason I like the stock is that it has long-term growth potential. With more than 50% of its revenues coming from the world’s emerging markets, there’s plenty of room for growth.

There are risks to the investment case. One risk is that its brands could lose their appeal. Overall, however, I think the long-term risk/reward proposition here is attractive.

Edward Sheldon owns shares in Unilever.

Kevin Godbold: SSE

FTSE 100 energy company SSE (SSE) has endured operational troubles in recent years but the business is growing now. The directors have steered operations towards renewables, such as wind generators. And the financial figures are on an improving trend. For example, I like the recent record of robust and rising cash flow. The company rebased the dividend lower for the trading year to March 2020, but it’s been moving higher since, with City analysts predicting further incremental increases ahead.

With the share price near 1,540p, the forward-looking yield is around 5.5%. I’d be keen to buy some of the stock and lock that rising income from this improving business into my diversified portfolio.

Kevin Godbold does not own any SSE shares.

Christopher Ruane: Imperial Brands

As income stocks go, Imperial Brands (LSE: IMB) is hardly a secret. But I still think it’s a top dividend stock for my portfolio.

Its yield exceeds 8%. That makes the tobacco giant one of the highest yielding FTSE 100 shares.

It recently raised its dividend. I took that as a sign of confidence that Imperial’s new strategy of focussing on cigarettes in its five key markets has started well.

It did cut its dividend last year, though, and uncertain future demand for cigarettes is a risk.

Christopher Ruane owns shares in Imperial Brands.

Rupert Hargreaves: Direct Line 

Insurance group Direct Line (LSE: DLG) is one of my favourite income investments. The company is one of the country’s largest insurers, which gives it a robust competitive advantage. Specifically, it has lower costs and a lower loss ratio than most of its peers. 

As a result, Direct Line is quite profitable, and management is committed to returning as much profit as possible to investors. 

At the time of writing, the stock offers a dividend yield of 7.3%. In addition, the group is also returning cash to investors by repurchasing shares. 

These cash returns could come under pressure if the company has to deal with higher than expected losses. An increase in costs may also lead to reduced profit margins. 

Despite these risks, I’d buy more shares in June. 

Rupert Hargreaves owns shares in Direct Line.

Paul Summers: Premier Miton Group

Small-cap asset manager Premier Miton (LSE: PMI) is likely flying under the radar of most income hunters. However, a 48% hike to the interim dividend after a 17% rise in profits may change this. 

Analysts are forecasting PMI will yield 5.2% in FY21 based on the share price as I type. That’s far more than the derisory 0.46% I’d get from the best Cash ISA.

Sure, the company’s line of work makes returns hard to predict. However, I think a P/E of just 12 takes this into account. A healthy balance sheet is also reassuring.  

Paul Summers has no position in Premier Miton Group

Alan Oscroft: City of London Investment Trust

City of London Investment Trust (LSE: CTY) has been dubbed a “Dividend hero” by the Association of Investment Companies, after raising its dividend for 54 years in a row. We’re looking at yield of around 4.8% now, which I find very attractive. Where does the trust put its money? It goes for UK equity income, with a spread of top FTSE 100 stocks in its portfolio.

So that’s my top dividend stock for June. Oh, and probably for July, August, next year, and five years time too… I see City of London as a serious long-term income investment.

 Alan Oscroft owns shares in City of London Investment Trust.

Nadia Yaqub: The Renewables Infrastructure Group

I think The Renewables Infrastructure Group (LSE: TRIG) offers me a great way to get exposure to the green energy sector. It’s a diversified portfolio of renewable energy assets located throughout the UK and Europe.

TRIG consists of 77 investments across solar, both onshore and offshore wind as well as battery storage. These assets generate revenues from the sale of electricity and government-backed green benefits.  

With economies focusing on net zero carbon emissions, this should act as a tailwind for TRIG shares. The investment trust isn’t cheap. It trades on a 13% premium to Net Asset Value (NAV). But given its dividend yield of over 5%, I reckon this stock is attractive for income investor in me.

Nadia Yaqub does not own shares in The Renewables Infrastructure Group.

Royston Wild: ITV 

A slew of positive news from the advertising industry leads me to believe that ITV (LSE: ITV) is a great income stock to buy today. 

ITV has itself seen a steady pickup in ad revenues in recent months. The emergence of Covid-19 variants could of course see this turnaround swiftly expire if infection rates balloon again. But for the time being there is plenty to get excited about as advertising income marches higher and ITV’s production units get back to work. 

Okay, ITV’s 3.7% dividend yield for 2021 may be chunky rather than jaw-dropping. But City expectations of a sustained profits recovery — and with them predictions that dividends will keep marching higher — nudges the yield to a very-handsome 4.3% for next year.

Royston Wild does not own shares in ITV.

Harshil Patel: Persimmon 

Persimmon (LSE:PSN) is my top income stock pick. It offers a forecasted dividend yield of 7%! This UK-based housebuilder aims to build good quality homes at a range of price points. 

Demand for newly built homes remains healthy, and average selling prices are higher than in 2020. In its most recent trading update, it said that its average private sales rate this year is “well-ahead” of 2020. 

Persimmon has high-quality land holdings, a strong balance sheet, and rising demand for its homes. That said, dividends can reduce if trading deteriorates. However, so far this year trading has been strong. Therefore, I expect to receive the forecasted 7% of dividend income. 

Harshil Patel does not own shares in Persimmon.

Manika Premsingh: Imperial Brands

It has a hefty 9.4% dividend yield, but tobacco biggie Imperial Brands (LSE: IMB) faces two criticisms.

One, tobacco stocks are going out of vogue as the world gets healthier. 

Two, it is often seen as a ‘sin stock’ in a time of ethical investing.

Here are my counter-arguments. First, tobacco companies are transitioning into healthier alternatives. Besides, for now tobacco demand is strong, evident from Imperial Brands healthy recent earnings.

Second, considering tobacco as ‘sin’ is debatable for me. Civil society and policy makers have done their bit to make consumers aware of its downside and also protect bystanders from harmful effects of second-hand smoke. Beyond that, consuming tobacco is a conscious adult choice.

It is my top dividend stock for June.

Manika Premsingh has no position in Imperial Brands.

Investment trusts offer several important benefits, in my opinion. One is I get to spread a modest sum across a range of actively-managed investments, without worrying about any conflict of interest. Buying the shares makes me a part-owner of the trust, and so its managers are working directly for me.

The other key thing I like is the way investment trusts can manage their dividends. Being able to retain up to 15% of their income in any year, they can build a reserve. And that helps to maintain long-term dividend stability.

Investment trust dividend heroes

I do already hold one, the City of London Investment Trust (LSE: CTY), and it’s just released first-half figures. The Association of Investment Companies (AIC) ranks City of London at the head of what it calls its ‘Dividend Heroes’. That includes all investment companies that have raised their dividends for 20-or-more-years in a row. City of London is in joint first place with Bankers Investment Trust (LSE: BNKR), achieving the feat for 54 consecutive years.

At December 2020, the former trust’s net asset value (NAV) per share stood at 357.4p. That’s up from 344p at 30 June.

Market sentiment appears to have improved. In June 2020, City of London shares were trading at a 1.2% discount to NAV. But the price has picked up since November and, by the end of 2020, it had moved to a 3.7% premium. I still think that’s reasonable value.

55 years of dividend hikes?

But what of my precious investment trust dividends? The company said it’s “confidence that it will be able to increase the dividend for the fifty-fifth consecutive year.” Saying that, the trust did suffer a significant fall in income in 2020, with its revenue earnings per share falling by 15.6%. It’s very tightly tied to the UK market too, so any prolonged economic downturn could hurt both the dividends and the share price.

So, for my next pick, I’ll try to balance my risks. I’m turning back to Bankers Investment Trust. And not just for those 54 years of dividend hikes. While City of London is focused on UK equities, Bankers sets its sights globally. That suits me personally for a couple of reasons. Firstly, I like a bit of global diversity. And, secondly, a chunk of my retirement income is going to be spent overseas, so it might help not to be totally tied to the UK economy.

That would expose me to risks associated with other parts of the world too. And, in many places, markets can be more volatile and subject to weaker regulation. But those are risks I’m prepared to take to fit my personal requirements.

Income vs growth

The dividend yield is only around 2%. But the Bankers Investment Trust share price is up 9% over the past 12 months (while City of London is down 17%, and the FTSE 100 has fallen 10%). Over five years, Bankers shares have more than doubled in price.

Right now, there’s only a modest premium to NAV, at just 0.6%. For my personal circumstances, I think these two really could be the best investment trusts I could buy in 2021.

Unlike other funds, investment trusts operate as companies. This means they have a level of flexibility regarding how much income they can distribute to investors as dividends. The structure also gives these businesses more flexibility for choosing investments.

Most investment trusts focus on stocks and shares, but some own commercial property, precious metals, private equity, hedge funds and even renewable energy assets. 

Another quirk of the investment trust structure is the ability to hold back a percentage of income every year. This enables investment trusts to hold back revenue in the good times to cover dividend payouts when the going gets tough. This proved extremely helpful in 2020 when many blue-chip companies slashed their dividends. Investment trusts were able to dig into their dividend reserves to cover shareholder payouts.

So, with that in mind, here are two investment trusts I would buy today to retire on a rising, passive income. 

Passive income investments 

There are a handful of investment trusts that have maintained their dividends for several decades. One of these is the City of London Trust (LSE: CTY). This firm prides itself on its dividend track record. It has maintained the distribution to investors since 1966. 

At the time of writing, the trust provides a dividend yield of 5.1%. To cover this income stream, it owns a portfolio of blue-chip income stocks. Some 86% of the portfolio is invested in UK equities, with the remainder spread worldwide to provide a level of diversification. 

As well as targeting a steady stream of income, the trust also aims to achieve a level of capital growth every year. It has been relatively successful on this front, achieving a total return of nearly 100% over the past 10 years. 

As long as the investment management sticks to the strategy that has been so successful over the past decade during the next 10 years, I think City of London could be one of the best investments to own when looking to build a passive income stream. 

Growth and income

With a dividend yield of 6.4% of the time of writing, the Value & Income Trust (LSE: VIN) could be another option for passive income investors like me. 

This trust uses an interesting model to generate income for its shareholders. Some 41% of the portfolio is invested directly in property across the UK. This provides exposure to the asset class and an uncorrelated income stream. The rest of the portfolio is invested in high-quality blue-chip stocks.

As such, investors receive the best of both worlds. Income from high-quality global dividends and a steady stream of income from property here in the UK. 

Unfortunately, due to the pandemic, Value & Income’s exposure to UK property has become a bit of a liability. Investors have dumped the stock as a result. It’s now trading at a discount of 23% to its underlying net asset value. However, I think this could be a great opportunity for long-term investors seeking a passive income to buy up a portfolio of high-quality income-generating assets at a discount. It’s on my watchlist.